As is obvious to everyone by now, much of the Western world suffered from a real-estate bubble over the last decade, and the consequences of the bursting of said bubble are still with us today in the form of low-growth; it isn't out of the question that the malaise of slow-growth which accompanied the bursting of Japan's bubble at the end of the 1980s might also now plague much of the West for a long-time going forward, especially given the need to reduce public debt. Still, for all of the above, the problems in Europe and America seem readily manageable when compared with the scale of the bubble that has arisen in China, as Nourel Roubini explains.
China's real-estate bubble can seem like an abstract problem of economic theory when put across in polite conversation as in the video above, but the following video should bring home just how massive the misallocation of resources has been.
The Chinese government may hold vast quantities of foreign reserves, but given the scale of bad debt which is building up within the country, and the lack of political legitimacy of the government which has allowed it to happen, even $2.5 trillion will likely prove insufficient to staunch the upsurge of discontent which will occur when this bubble bursts - and burst it will, as they always do.
The ramifications of a Chinese real estate bubble burst could well spread beyond that country - to South America and African economies which are trying to cultivate China as a primary market for raw materials export.
Also, no Japanese style "Public Works / Developmental" state to artificially prolong investment in construction, manufacturing etc; So, bubble could burst very soon - though, I am aware that China has been throwing billions at rails and airports, etc.
I do not believe that China is operating a true developmental state model. I have seen papers that try to claim the reverse but I am not convinced.
Posted by: Chuckles | July 11, 2011 at 10:22 AM